Autosports Group. Luxurious future A$2.55 AUSTRALIA. Prestige and luxury growing faster than the market. A focussed business. Not just a roll up

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1 AUSTRALIA ASG AU Price (at 04:59, 18 Jan 2017 GMT) Outperform A$2.55 Valuation - EV/EBITA A$ month target A$ month TSR % Volatility Index Low/Medium GICS sector Retailing Market cap A$m day avg turnover A$m 0.7 Number shares on issue m Investment fundamentals Year end 30 Jun 2017E 2018E 2019E 2020E Revenue m 1, , , ,784.3 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % nmf PGCFPS x EPS adj EPS adj growth % nmf PER adj x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x Source: FactSet, Macquarie Research, January 2017 (all figures in AUD unless noted) 20 January 2017 Macquarie Securities (Australia) Limited Luxurious future We initiate coverage on with an Outperform recommendation and a target price of $2.83 per share. Prestige and luxury growing faster than the market (Autosports) is an automotive dealer with a focus on the prestige and luxury segments of the market. Over the past 20 years, the market share of prestige and luxury brands has increased from 14.6% to 36.2% of the new vehicle market. The compound volume growth in the prestige segment has been 8.3% over the past 20 years, more than double the overall market volume growth of 3.0%. A focussed business Autosports commenced operation in 2006 with the greenfield establishment of an Audi dealership in Sydney. It now operates from 27 facilities across new vehicle dealerships, used vehicle dealerships and collision repairs. The focus is on 11 prestige and luxury brands concentrated in Sydney and Brisbane. Autosports growth has been from a mixture of greenfield start-ups and acquisitions. Of the 27 current trading locations, 12 were greenfield and 15 were acquired. Having such a high level of greenfield development means the Autosports business can deliver high levels of organic growth as the back end of the business matures. Autosports will continue to look for prestige and luxury acquisitions. Not just a roll up Autosports has grown from eight facilities in FY14 to 27 in FY17. Like for like revenue growth was 17.1% during FY15, 18.8% in FY16 and in FY17e, the prospectus forecast is 8.7%. A feature of forecast FY17 revenue is the 26% growth forecast in service revenue as greenfields sites established in prior years begin to mature. High levels of cash conversion will allow Autosports to target a dividend payout ratio of 60-70% of NPATA. The company expects to be in a net cash position excluding floor plan finance. Target price of $2.83 per share The closest listed peers are AHG and APE. AHG is trading at a low PE relative to ASX 200, demonstrating the market s concern over recent ASIC inquiries, its relatively high exposure to the poorly performing WA new vehicle market and the outlook for the logistics business. Conversely APE trades at a much higher multiple due to its exposure to the higher growth east coast new vehicle markets. We believe the Autosports business should trade at a premium to AHG given its geographic exposure is more similar to the APE business than the AHG business. Our valuation range is $2.34-$2.55ps with our price target set at $2.83ps or 12.0x FY18e PBT, being the roll forward of this valuation. Risks Key risks include: Economic and retail conditions, contractual relationships with Original Equipment Manufacturers (OEMs), floor plan funders and insurers, motor vehicle supply, exchange rates, regulation (particularly in light of the current ASIC reviews), customer preference, key personnel and reputation, acquisition risk and online competition. Please refer to page 51 for important disclosures and analyst certification, or on our website

2 Inside Luxurious future 3 Valuation 6 Risks 10 Prestige and luxury segment growing faster than the vehicle market 11 A focussed business 22 Not just a roll up 27 Appendix 1 Key people 42 Appendix 2 Brand segmentation 43 Appendix 3 Peer summary financials 44 Appendix 4 Industry regulation 49 Company profile Autosports commenced operation in 2006 with the greenfield establishment of an Audi dealership in Sydney. It now operates from 27 facilities across new vehicle dealerships, used vehicle dealerships and collision repairs. The focus is on 11 prestige and luxury brands concentrated in Sydney and Brisbane. The core focus is on the sale of prestige and luxury vehicles, providing both front-end and back-end products and services including aftermarket, parts and servicing and finance and insurance products to its customers across the vehicle life cycle. Autosports growth has been from a mixture of greenfield start-ups and acquisitions. Of the 27 current trading locations 12 were greenfield and 15 were acquired. Audi is the largest brand by new car sales volume and is 38% of total volume followed by Volkswagen at 27%. The top four brands contribute 88% of volume and all of these have experienced strong compound volume growth over the past 20 years of at least 10.8% per annum according to VFacts data. Autosports has a growth strategy based on both organic and acquisitive growth. Organic growth comes from maturing and new greenfield developments. Core to this strategy is building on Autosports relationships with OEMs including developing multiple sites with each OEM. Autosports has acquired 13 dealerships since 2006 and will continue to look for prestige and luxury acquisitions in capital cities. Fig 1 Facility growth over time Source: Autosports, January 2017 Fig 2 ASG AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 (all figures in AUD unless noted) 20 January

3 Prestige and luxury market compound growth of 8.3% per annum over last 20 years Over 50% of growth is organic Luxurious future Prestige and luxury segment growing faster than the vehicle market Autosports is an automotive dealer with a focus on the prestige and luxury segments of the market. We believe a key driver of the new vehicle market is vehicle affordability. At its simplest, this is the ratio of vehicle prices to wages. The key economic drivers of new vehicle demand are: consumer sentiment, household disposable income, exchange rates, interest rates and fuel prices. We believe the long-term trends in all these factors have generally been positive, which has driven volume growth in the market. Over the past 20 years, the market share of prestige and luxury brands has increased from 14.6% to 36.2% of the new vehicle market. The compound volume growth in the prestige and luxury segment has been 8.3% over the past 20 years, more than double the overall market volume growth of 3.0% over the same period. There are several key reasons for these trends. These include. Increased affordability of prestige and luxury vehicles, both in absolute terms and relative to volume brands. Expansion of OEM product offering from prestige and luxury brands. Increased consumer preference for luxury and premium brands. Increased availability and affordability of parts for European manufactured vehicles. A focussed business Autosports commenced operation in 2006 with the greenfield establishment of an Audi dealership in Sydney. It now operates from 27 facilities across new vehicle dealerships, used vehicle dealerships and collision repairs. The focus is on 11 prestige and luxury brands concentrated in Sydney and Brisbane. Autosports growth has been from a mixture of greenfield start-ups and acquisitions. Of the 27 current trading locations, 12 were greenfield and 15 were acquired. Audi is the largest brand by new car sales volume and is 38% of total volume followed by Volkswagen at 27%. The top four brands contribute 88% of volume and all of these have experienced strong compound volume growth over the past 20 years of at least 10.8% per annum according to VFacts data. Autosports has a growth strategy based on both organic and acquisitive growth. Organic growth comes from maturing and new greenfield developments. Core to this strategy is building on Autosports relationships with OEMs including developing multiple sites with each OEM. Having such a high level of greenfield development means the Autosports business can deliver high levels of organic growth as the back end of the business matures. Autosports has acquired 13 dealerships since 2006 and will continue to look for prestige and luxury acquisitions in capital cities. 20 January

4 Not just a roll up Autosports has grown from eight facilities in FY14 to 27 in FY17. Since the commencement of FY14, 7 greenfield facilities have been established, 7 facilities have been acquired, and 5 dealerships will be acquired on completion from Willims Motor Group. Strong like for like growth And conservative earnings forecasts Valuation set at x pre tax profit Like for like revenue growth was 17.1% during FY15, 18.8% in FY16 and in FY17e, the prospectus forecast is 8.7%. Other revenue is typically mostly related to new car sales revenue and is forecast to fall from ~6% of new car revenue to 5.1% in FY17 as the FY17 forecast does not reflect some contingent bonuses. A feature of forecast FY17 revenue is the 26% growth forecast in service revenue as greenfield sites established in prior years begin to mature and vehicles return to dealerships for their second and third services. The cost of doing business has been falling marginally as a proportion of revenue due to a combination of careful cost management and increased scale of the business. Conservatively, there are no synergies forecast from the Willims acquisitions in FY17. Autosports is a strong cash generator as cars are paid for on delivery. Growth capex has generally been for greenfield dealer establishments and expansions. High levels of cash conversion will allow Autosports to target a dividend payout ratio of 60-70% of NPATA. The pro-forma balance sheet had inventory of $214.0m funded by $215.5m in floor plan facilities. The company expects to be in a net cash position excluding floor plan finance. Target price of $2.83 per share The closest listed peers are Automotive Holdings (AHG AU, A$3.92, Outperform, TP: $4.50, Andrew Wackett) and AP Eagers (APE, not covered), in our view. AHG is trading at a low PE relative demonstrating the market s concern over recent ASIC inquiries, its relatively high exposure to the poorly performing WA new vehicle market and the outlook for the logistics business. Conversely, APE trades at a much higher multiple due to its exposure to the higher growth east coast new vehicle markets and its property (~$285m) and stock market investments (~$254m), which combined are ~32% of its ~$1.7bn market capitalisation. The Australian listed companies are trading at a premium to international peers, reflecting Australia s higher growth outlook and greater scope for material acquisitive growth. The international peers are trading over a 12.9x-13.6x December 2016 PER range. They have been de-rated recently due mostly to concerns over slower growth rates in the US new car sales market in CY16. When looking at automotive dealer company valuations, we adjust the EBITA and net debt for floor plan funding. This is due to the fact that inventory must be paid for upfront (i.e. there are no creditors). We estimate AP Eagers automotive business is trading on 12.4x CY16 based on Factset consensus PBT after adjusting for investments and property. We estimate the AHG automotive business is trading on 8.6x FY17e PBT after adjusting for logistics at 5x EBITDA. We believe the Autosports business should trade at a premium to AHG given its geographic exposure is more similar to the APE business than the AHG business. In addition, Autosports does not have concerns about a poorly performing division dragging down its overall multiple. Our valuation range is $2.34-$2.55ps with our price target set at $2.83ps or 12.0x FY18e PBT, being the roll forward of this valuation. 20 January

5 Risks Economic and retail conditions Autosports is exposed to economic and retail conditions, especially in New South Wales and South East Queensland. Business conditions, consumer spending, interest rates and oil price changes could all lead to lower new vehicle sales and the deferment of vehicle servicing. Contractual relationships with OEMS, floor plan funders and insurers Relationships with OEMs are critical for the maintenance of earnings and future growth, for example selection for future greenfield opportunities. Floor plan funding arrangements are generally renewed annually and can impact profitability depending on renewal terms. Motor vehicle supply Autosports could be impacted by vehicle supply interruptions such as the quantity of inventory sent to Australia by an OEM, delays in shipping, product defects or safety recalls. Exchange rates A weak Australian dollar particularly compared to the Euro and Yen can impact the affordability of imported vehicles. In practice, many OEMs maintain pricing points despite movements in exchange rates and vary the level of extras and add-ons. Regulation As detailed in appendix 4, automotive dealers are subject to substantial laws and regulations. ASIC is considering changes to finance commission structures (flex commissions) and insurance products (add on insurance). The ACCC is also undertaking a market study into the new car retailing industry. Customer preference Autosports focuses on the prestige and luxury segments and could be impacted by a change in consumer preferences and taste. 64% of Autosports FY16 new vehicle volume is from its top two brands, Audi and Volkswagen. Key personnel and reputation Reputational issues could impact on Autosports as could the loss of its two key founders Nick and Ian Pagent. Acquisition risk Autosports is likely to pursue acquisitions and is exposed to acquisition risk from poorly performing acquisitions. Online competition Autosports could be impacted by increased internet-based competition and new technologies. This could include new private to private car sales technologies, online retailers and ride sharing technologies. 20 January

6 AHG trades at a discount Valuation Australian peers We detail, in the charts below, the trading history of Autosports peer Automotive Holdings. Fig 3 AHG PER has normalised somewhat in recent times AHG absolute PER AHG PE relative to the ASX AHG-AU ASX 200 Industrials 1.2 AHG-AU Rolling 36M Mean Mean + 1 Stdev Mean - 1 Stdev Source: Factset, January 2017 The charts above clearly highlight that AHG is trading at a low PE relative demonstrating the market s concern over recent ASIC inquiries, its relatively high exposure to the poorly performing WA new vehicle market and the outlook for the logistics business. While APE trades mostly at a premium We detail, in the charts below, the trading history of Autosports peer AP Eagers. Fig 4 APE trades at a much higher multiple APE absolute PER APE PE relative to the ASX Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 APE-AU ASX 200 Industrial Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 APE-AU Rolling 36M Mean Mean + 1 Stdev Mean - 1 Stdev Source: Factset, January 2017 Conversely APE trades at a much higher multiple due to its exposure to the higher growth east coast new vehicle markets and its property (~$285m) and stock market investments (~$254m), which combined are ~32% of its ~$1.7bn market capitalisation. Adjusting APE earnings and NPAT (source: Factset consensus) for the above property and investments, we estimate its CY16e PER is boosted by x. 20 January

7 Peer group valuation In the table below, we have compared the consensus valuation of Autosports to Australian peers, US peers and Inchcape. All companies have a December year end except for AHG and we have converted the share prices and market capitalisation of the US listed stocks to AUD at current exchange rates. Fig 5 Peer group average December 2016 PER is 13.5x EV/EBITA PER Dividend Yield Security Price Market Cap FY1 FY2 FY1 FY2 FY1 FY2 Automotive Holdings $3.91 $1,297m 11.8x 11.2x 12.7x 12.0x 5.8% 6.1% A.P. Eagers Limited $9.00 $1,715m 14.3x 13.0x 17.5x 16.0x 3.7% 4.1% AutoNation, Inc. $68.50 $6,922m 9.1x 9.9x 12.9x 12.0x 0.0% 0.0% Penske Automotive $70.09 $5,970m 10.8x 10.1x 13.6x 12.4x 2.1% 2.2% Lithia Motors $ $3,376m 9.1x 8.1x 13.7x 12.2x 1.0% 1.0% Inchcape plc $11.75 $4,946m 8.7x 7.8x 12.9x 11.7x 3.2% 3.5% Total/Average $24,225m 9.9x 9.6x 13.5x 12.3x 1.9% 2.0% High 14.3x 13.0x 17.5x 16.0x 5.8% 6.1% Low 8.7x 7.8x 12.7x 11.7x 0.0% 0.0% Source: Factset, January Prices as of 19 January The Australian listed companies are trading at a premium to international peers, reflecting Australia s higher growth outlook and greater scope for material acquisitive growth. The international peers are trading at 12.9x-13.6x December 2016 PER. They have been derated from previous levels due mostly to concerns over slower growth rates in the US new car sales market in CY16 after several years of strong recovery post the GFC, from 10.4m units to ~17m units. Fig 6 AutoNation and other US peers have recently de-rated over lower growth forecasts in the US market (FY1 PER x) Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Factset, January 2017 Recent US new car sales estimates were for a relatively flat market in CY16 at~17m units. Q2 CY16 sales were down ~2% on Q2 CY January

8 Detailed valuations of Australian peers We value dealerships on an adjusted PBT basis When looking at automotive dealer company valuations, we adjust the EBITA and net debt for floor plan funding. This is due to the fact that inventory must be paid for upfront (i.e. there are no creditors). In the analysis below, we have adjusted for this. The valuation multiples of AP Eagers are boosted by the large property and investment portfolio. The table below adjusts for these to back-solve the underlying multiple that the automotive business is trading on. Fig 7 We estimate the APE automotive business is trading on 12.4x CY16e PBT after adjusting for investments and property CY16 CY17 Market cap 1, ,717.0 Net debt EV 2, ,414.0 Floorplan Investments Property Adjustments 1, ,026.9 Adjusted EV 1, ,387.2 Auto PBT Auto PBT multiple 12.4x 10.7x Source: Factset estimates, Macquarie Research, January 2017 AP Eagers automotive business is trading on 12.4x CY16e Factset consensus PBT after adjusting for investments and property. In the above table, we have used Factset consensus EBIT estimates adjusted for the earnings from the property and investment portfolio from which we have subtracted a $17.1m annual cost of floor plan funding. The investment portfolio is largely made up of a ~20% shareholding in AHG, which we have valued at the current AHG share price. We have detailed our AHG automotive valuation estimate in the table below. Fig 8 We estimate the AHG automotive business is trading on 8.6x FY17e PBT after adjusting for logistics at 5x EBITDA FY17 FY18 Market cap 1, ,296.6 Net debt EV 2, ,248.1 Floorplan Investments EBITDA Mult 0.0 Total Logistics Adjustments 1, ,011.5 Adjusted EV 1, ,236.6 Auto PBT Auto PBT multiple 8.6x 8.4x Source: Macquarie Research, January 2017 In the above table, we have adjusted automotive EBITA for our estimate of FY17e floor plan funding costs of $28.5m. We have also removed our estimate of total floor plan from net debt so as to match the numerator and denominator in our valuation. We have also valued the logistics business at 5x EBITDA for the purposes of this exercise. 20 January

9 If we were to average the forward automotive multiples calculated above (APE and AHG) we would derive a valuation multiple of 10.5x. Autosports has a similar geographic exposure to APE We believe the Autosports business should trade at a premium to this average given its geographic exposure is more similar to the APE business than the AHG business. In addition, Autosports does not have concerns about a poorly performing division dragging down its overall multiple. We detail our Autosports valuation in the table below. Fig 9 We value Autosports at 11.0x 12.0x FY17e PBT Valuation FY17e Multiple- Low Multiple - High Value - Low Value - High EBITA 48.6 Less Floorplan cost 7.0 Total Less Net Debt Add floorplan Plus option Cash Value Diluted Shares on Issue Value per share $2.34 $2.55 Source: Macquarie Research, January 2017 Our valuation range is 11.0x-12.0x FY17e PBT or $2.34 to $2.55, which is a PER of 16.7x to 18.2x. We have used PBT and adjusted debt for floor plan funding as the funder retains ownership of the vehicle but the dealer has possession. Our price target of $2.83 is calculated by rolling forward this valuation to FY18e. This is detailed below. Fig 10 Our price target is $2.83 based on rolling our valuation forward a year Valuation FY18e Multiple- Low Multiple - High Value - Low Value - High EBITA 52.8 Less Floorplan cost 7.0 Total Less Net Debt Add floorplan Plus option Cash Value Diluted Shares on Issue Value per share $2.60 $2.83 Source: Macquarie Research, January 2017 DCF Valuation cross check and WACC assumptions Our DCF valuation provides an equity valuation of $2.90 to $3.07, which is an implied PER of 20.7x- 21.9x. Key assumptions to derive our WACC calculation include. Risk free rate of 3.25% and an equity risk premium of 5.0% consistent with our Australian research team. We assume an equity beta of 1.3 to 1.5. Pre-tax cost of debt of 4.0%. These assumptions drive our base case WACC of 8.6%. We have forecast year 5 to 10 flow growth of ~3% per annum and not included any potential acquisitions in our estimates. Terminal EBITDA multiple of 10x. 20 January

10 Risks Economic and retail conditions Autosports is exposed to economic and retail conditions, especially in New South Wales and South East Queensland. Business conditions, consumer spending, interest rates and oil price changes could all lead to lower new vehicle sales and the deferment of vehicle servicing. Contractual relationships with OEMS, floor plan funders and insurers Relationships with OEMs are critical for the maintenance of earnings and future growth, for example selection for future greenfield opportunities. A number of dealership agreements are generally up for renewal each year and often all dealerships with an individual OEM are up at the same time. There is a risk an agreement is not renewed on similar terms or at all. Floor plan funding arrangements are generally renewed annually and can impact profitability depending on renewal terms. Most dealership agreements and floor plan funding arrangements can be terminated on 30 to 90 days notice. Motor vehicle supply Autosports could be impacted by vehicle supply interruptions such as the quantity of inventory sent to Australia by an OEM, delays in shipping, product defects or safety recalls. Exchange rates A weak Australian dollar particularly compared to the Euro and Yen can impact the affordability of imported vehicles. In practice, many OEMs maintain pricing points despite movements in exchange rates and vary the level of extras and add-ons. Regulation As detailed in appendix 4, automotive dealers are subject to substantial laws and regulations. ASIC is considering changes to finance commission structures (flex commissions) and insurance products (add on insurance). The ACCC is also undertaking a market study into the new car retailing industry. For more detailed information, refer to appendix 4. Customer preference Autosports focuses on the prestige and luxury segments and could be impacted by a change in consumer preferences and taste. 64% of Autosports FY16 new vehicle volume is from its top two brands, Audi and Volkswagen. Key personnel and reputation Reputational issues could impact on Autosports as could the loss of its two key founders Nick and Ian Pagent. Reputational damage could be caused by a number of factors including OEM actions, poor service and failure to comply with regulations. Acquisition risk Autosports is likely to pursue acquisitions and is exposed to acquisition risk from poorly performing acquisitions. Online competition Autosports could be impacted by increased internet based competition and new technologies. This could include new private to private car sales technologies, online retailers and ride sharing technologies. 20 January

11 Focus is on prestige and luxury brands Prestige and luxury segment growing faster than the vehicle market Australian Automotive market structure Autosports is an automotive dealer with a focus on the prestige and luxury segments of the market. Dealers typically have four main revenue sources. These are listed below. Sale of new and used vehicles. Ancillary product sales like finance, insurance and aftermarket products. Parts sales, and Vehicle servicing. These revenue streams are referred to as front end or back end services as detailed in the schematic below. Fig 11 Schematic of the Automotive dealership industry Source: Autosports, January 2017 Dealers are licensed retailers of new (and used) vehicles appointed by OEMs. The dealership agreement provides exclusivity for a particular brand in a particular region (prime market area). Front end services all relate to revenue generated on the sale of the vehicle. Finance and insurance income is typically commissions from insurers and floor plan funders. 20 January

12 Floor plan funders, some of which are owned by OEMs, perform a vital role in the industry as OEMs typically do not offer debtor terms to dealers. These funders fund the dealer vehicle purchase from the OEM typically at a low cost and then generally seek to make retail finance available to the vehicle purchaser. We have highlighted how this works in the table below. Fig 12 Floor plan funding overview Source: Autosports, January 2017 The floor plan funder legally owns the vehicle until it is sold. Once a sale occurs, the customer (or his financier) pays the dealer who repays the floor plan funder. 20 January

13 NSW NSW NSW Macquarie Wealth Management The Australian automotive market is a solid market Broad new vehicle market has experienced 3% compound growth over time The Australian vehicle market has experienced 3.0% compound volume growth over the past 20 years. This is depicted in the chart below. Fig 13 Australian total new vehicle sales ( ) 1,200,000 1,000, , , , , Source: VFACTS, June 2016 The new vehicle market grew from 636,000 units in CY96 to 1,123,000 units in CY15. Minor volume falls occurred during the GST introduction and Sydney Olympics in 2000 and during the global financial crisis in 2008 and The estimated size of the used car market in Australia is approximately 3.7 million units in 2014, according to the Manheim used car report This report also estimated annual growth in used vehicle wholesaling has been 3.7% over the past five years, with the annual growth for expected to be 5.2% per annum. In its 2015 AGM presentation, Automotive Holdings Group estimated the vehicle market to be $81bn per annum in CY15 made up of $30bn in new cars (1,155,000 units at $26,000 per unit) and $51bn in used vehicles (2,200,000 units at $23,200 per unit). AHG further broke the used market down into $36bn of dealer used and $15bn of private sales. East coast markets are solid New South Wales, Victoria and Queensland account for 33%, 27% and 20% of national new vehicle volume or a combined 80% of national new vehicle sales. These are the states Autosports operates in. Recent trends in new vehicle sales for these states are depicted in the charts below. Fig 14 Autosports state markets all grew in FY16 (LTM % change in new vehicle sales) NSW - FY16 sales up 7.6% Vic - FY16 sales up 4.0% Qld - FY16 sales up 2.9% 20.00% 25.00% 20.00% 15.00% 20.00% 15.00% 10.00% 15.00% 10.00% 5.00% 0.00% 10.00% 5.00% 0.00% 5.00% 0.00% -5.00% -5.00% -5.00% % % % % % Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec % Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec % Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Source: VFACTS, June January

14 Vehicle affordability driving the market We believe a key driver of the new vehicle market is vehicle affordability. At its simplest, this is the ratio of vehicle prices to wages. We have depicted this in the charts below. Fig 15 Car prices have been declining (index value) Fig 16 Steeply compared to wages (ratio x) Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Vehicles AUDUSDx100 Source: ABS, January 2017 We believe the key economic drivers of new vehicle demand are as below. Consumer sentiment. Low unemployment and economic growth are key drivers of consumer sentiment, which is likely to boost car sales and servicing volumes. Household disposable income. Rising wages and wealth, particularly house and share prices, tends to lead to increases in vehicle affordability. Exchange rates. A strong Australian dollar can improve the affordability of imported vehicles. AP Eagers estimated in an August 2016 presentation that 28% of vehicles sold in Australia were manufactured in Japan, 24% in Thailand, 18% in the EU and 14% in Korea. In practice, many OEMs maintain pricing points despite movements in exchange rates and vary the level of extras and add-ons. Interest rates. Low interest rates also lead to increases in vehicle affordability. In our September 2015 report, Auto financing sector Outsourcing trend to continue, we estimated 49% of vehicle purchasers used finance in 2015 compared to 41% in Fuel prices. Fuel is a major cash operating cost of owning a vehicle and lower fuel prices can boost affordability. Trends in vehicle affordability have been positive We believe the long-term trends in all these factors have generally been positive, which has driven volume growth in the market. 20 January

15 Macquarie Wealth Management There is a growing market preference for prestige and luxury brands Prestige and luxury market share has more than doubled Deloitte has divided the new car sales market into three main categories: volume, prestige and luxury. We have detailed the full brand segmentation in appendix 2 to this report. Autosports focuses on the prestige and luxury segments of the market. Over the past 20 years, the market share of prestige and luxury brands has increased from 14.6% to 36.2% of the new vehicle market. We have depicted this in the charts below. Fig 17 Prestige and luxury brands have been taking market share The prestige market has grown from 88k units to over 400k units Or from 14.6% to 36.2% of the market % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Luxury and Prestige Other vehicles Luxury and Prestige Other vehicles Source: VFACTS, June 2016 The compound volume growth in the prestige and luxury segment has been 8.3% over the past 20 years, more than double the overall market volume growth of 3.0% over the same period. Compound growth of 8.3% compared to 3.0% for the total market We have detailed the highest volume prestige and luxury brands below. Fig 18 Australia s highest volume prestige and luxury brands Mazda Volkswagen Subaru Honda Mercedes-Benz BMW Jeep Audi Land Rover Lexus Volvo Car Peugeot Fiat MINI Alfa Romeo 11,885 8,691 4,943 3,342 25,022 23,088 Source: VFACTS, Deloitte, June , ,000 40,000 60,000 80, , ,000 Luxury Prestige 20 January

16 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Macquarie Wealth Management This trend is clearly demonstrated by the fall in sales of traditional favourites Holden and Ford when compared to the growth of many of the prestige and luxury brands. Fig 19 Holden and Ford sales declining Fig 20 While Luxury and Prestige grow 200, , , , , ,000 80, , ,000 80,000 60,000 60,000 40,000 20,000 40,000 20, Holden Source: VFACTS, June 2016 Ford Alfa Romeo Audi Fiat Honda Mazda Mercedes-Benz Volkswagen Volvo Car Australia s favourite cars... Fig 21 Holden Commodore # Sales (rolling average 12 months) Fig 22 Ford Falcon # Sales (rolling average 12 months) 120, ,000 80,000 60,000 40,000 20, ,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Holden Commodore - rolling 12m average Ford Falcon - rolling 12m average Source: VFACTS, June 2016 Are being replaced... Fig 23 VW Polo & Golf # Sales (rolling average 12 months) Fig 24 Audi A3 # Sales (rolling average 12 months) 35,000 30,000 25,000 20,000 15,000 10,000 5, ,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Volkswagen Polo & Golf - rolling 12m average Audi A3 - rolling 12m average Source: VFACTS, June January

17 Macquarie Wealth Management Another key feature of the market is the growth in SUV sales over time, from 8% of sales in 1996 to 36% of sales in This is detailed below. Fig 25 Annual SUV Sales continue to grow and now comprise ~36% of all cars sold in Australia Fig 26 Annual SUV sales of Autosports 4 highest revenue drivers are also growing quickly 450, , , , , , , ,000 50, % 50% 40% 30% 20% 10% 0% -10% 4,000 3,500 3,000 2,500 2,000 1,500 1, SUV Annual Sales % total Australia Sales Audi Volkswagen Mercedes-Benz Mazda Source: VFACTS, June 2016 There are several key reasons for these trends. These include: Increased affordability of prestige and luxury vehicles, both in absolute terms and relative to volume brands. Expansion of OEM product offering from prestige and luxury brands. Examples include the Q series SUV range offered by Audi and the growth in the small (affordable) car offering with successful models like the Volkswagen Golf and Audi A3. Increased consumer preference for luxury and premium brands. Increased availability and affordability of parts for European manufactured vehicles. With respect to pricing and affordability, on the following page we detail the prices of new and used premium and luxury models over time compared to the locally manufactured alternatives. The charts show the new price for that model bought during the year, while the used price shows the price expected today for that year model car. For example, a 2007 model VW Golf could be expected to sell for around $8,100 today. 20 January

18 Fig 27 Volkswagen Golf GTI new price and wholesale price ($) Fig 28 Mercedes-Benz C200 new price and wholesale price ($) $50,000 $80,000 $45,000 $40,000 $35,000 $30,000 $70,000 $60,000 $50,000 $25,000 $40,000 $20,000 $15,000 $10,000 $5,000 $30,000 $20,000 $10, $ $ New price Wholesale price ($) New Wholesale price ($) Fig 29 Audi A3 new price and wholesale price ($) Fig 30 Mazda 3 new price and wholesale price ($) $50,000 $30,000 $45,000 $40,000 $25,000 $35,000 $30,000 $20,000 $25,000 $15,000 $20,000 $15,000 $10,000 $10,000 $5,000 $5, $ $ New Price Wholesale price ($) New Price Wholesale price ($) Fig 31 Holden Commodore SV6 new price and wholesale price ($) Fig 32 Ford Falcon XR6 new price and wholesale price ($) New price Wholesale price ($) New price Wholesale price ($) Source: Glass s data, January January

19 Dealership revenue and profitability model Dealers generate revenue over the life cycle of the vehicle from both front end and back end operations. Front end includes the sale of new and used cars, finance and insurance and aftermarket sales. Aftermarket sales include the sale of non OEM products such as window tinting, roof racks, fabric protection, tyre and wheel protection, extended warranty products and accessories. Back end includes servicing, parts sales and panel beating. Industry consultant Deloitte publishes dealership profitability benchmarks for the top 30% of dealerships. We have detailed the 2016 benchmarks in the table below. Fig 33 Deloitte dealership profitability benchmarks 2016 Average earnings mix (% gross profit) Volume Prestige Luxury 53% front-end 47% back-end 53% front-end 47% back-end 55% front-end 45% back-end Average gross profit per employee per month $9,500 $10,200 $11,900 Average margin (gross profit per Motor Vehicle unit) Orientation of Dealer gross profit Average gross profit margin Average fixed costs (overheads as a % of gross profit) Source: Deloitte, January 2017 New Vehicle - $2,700 Used Vehicle - $2,700 New Vehicle sale 38% Used Vehicle sale 15% Parts 13% Servicing 34% New Vehicle 8-10% Used Vehicle 14 16% Parts 22 26% Servicing 64 68% New Vehicle - $2,850 Used Vehicle - $2,700 New Vehicle sale 39% Used Vehicle sale 14% Parts 13% Servicing 34% New Vehicle 8 10% Used Vehicle 13 15% Parts 22 26% Servicing 64 68% New Vehicle - $4,650 Used Vehicle - $2,700 New Vehicle sale 43% Used Vehicle sale 12% Parts 14% Servicing 31% New Vehicle 10 12% Used Vehicle 12 14% Parts 22 26% Servicing 65 69% 45% 42% 39% The above table highlights that prestige and luxury dealers typically make 53-55% of their gross profit from the front end with the balance of gross profit generated over the life of the vehicle. Mature dealers make nearly half their gross profit from the back end Included in the front end is finance and insurance, which is typically 18% of total gross and other income and incentives, which is typically 11% of gross for a prestige dealer. The gross profit per new vehicle in the above table includes OEM incentive payments. These are based on a set of KPIs including volume, service quality, facility standards, reporting and customer satisfaction. Typical finance and insurance penetration for a prestige dealer is 30-34% of new cars sold with average revenue of $2,700-$2,900 per finance contract. Insurance revenue is ~20%- 25% of the revenue of finance on a per unit sold basis. While prestige and luxury dealers have a higher gross per employee and lower fixed cost as a percentage of gross profit, they have the same net profit to sales ratio of 4.1%-4.4% due to lower throughput when compared to volume dealers. Servicing is an important component of dealer profitability and comes from vehicles sold by the dealership, the public and warranty claims, which are generally paid for by the OEM. The ability of a dealership to attract and retain service customers is a key driver of overall profitability. Following on from the above discussion, we see several key profit drivers for a dealership. These include: 20 January

20 Relationships with OEMs. A strong track record makes it more likely a dealer will be appointed to develop new greenfield sites and be approved to purchase other dealerships. Cost of floor plan. Floor plan terms can be critical to dealership profitability both in terms of cost and to be able to sell sufficient stock. Inventory management. Stock turns are a key profitability driver with a good dealer able to generate 6-7 turns on new and 5-6 on used vehicles. This is not only important to efficiency but also capital as typically floor plan on used vehicles is lower than the 100% available on new vehicles. Economies of scale. Economies of scale generate better buying power and enable fixed overheads to be spread over a wider sales base. Competition The dealership industry in Australia is fragmented with ~2,500 new vehicle dealerships in operation nationally. In the table below, we have summarised the listed dealer groups and Autosports. Fig 34 Key ASX listed dealership groups Operator Number of OEM-appointed Dealerships and Collision Repair Facilities Estimated average revenue per Dealership OEM brand portfolio (by number of new Motor Vehicle Dealerships) Geographical presence (by number of new Motor Vehicle Dealerships) Automotive Holdings Group 179 $26.4m Limited AP Eagers Limited 80 $42.5m 25 $44.7m Source: Company filings and websites, January January

21 There are other substantial non listed dealership groups in Australia. This includes the Inchcape group, which generated $ bn in 2015 sales from its portfolio of 15 mostly prestige and luxury brands. In total, Inchcape has 23 retail centres, which generated ~$55m in revenue per centre. Inchcape expanded in Australia in February 2013 with the $116m purchase of the Trivett group for 5.6x CY12 EBITDA. Adjusted to exclude property (and including notional rent), this fell to 4.4x EBITDA. We provide a comprehensive comparison of the listed car dealers in the following sections. Entry barriers There are several barriers to entry to the automotive dealership industry. These include. Prime market area. Dealers have the right to operate their OEM dealerships in their prime market areas. This limits competition from dealers selling for the same OEM. In addition, dealers with a strong track record are more likely to be granted new dealerships. Dealership agreement compliance. OEM dealership sales targets and KPIs can be complex and inexperienced dealers can find it difficult to maximise OEM bonuses. Capital. The capital to establish an OEM greenfield site can be up to $30m on top of required working capital. This is especially true for prestige and luxury dealers. Profit margins. Given the 4.1%-4.4% net profit margins referred to above, losses can be significant on a new dealership before sufficient scale is achieved. 20 January

22 Autosports will operate from 27 facilities on completion A focussed business Focus is on prestige and luxury brands Autosports was founded in 2006 with the greenfield establishment of an Audi dealership in Sydney. On completion it will operate from 27 facilities across new vehicle dealerships, used vehicle dealerships and collision repairs. The focus is on 11 prestige and luxury brands as detailed below. Fig 35 Overview of Autosports facilities Source: Autosports, January 2017 Autosports operates two specialist used vehicle businesses, Prestige Auto Traders in Sydney and Autosports Brisbane. These two businesses act as used hubs and source vehicles from multiple sources including trade-ins and private sellers. They then sell direct, through Autosports dealerships and wholesale to other dealerships. Including 2 specialist used vehicle businesses These businesses provide a competitive advantage to Autosports as they aid accurate pricing and fast turnover of used vehicles, giving management visibility on market trends. This is important as used inventory depreciates in value over time and used floor plan finance attracts a higher capital charge. Autosports operates two collision repair businesses in Sydney, Pat Cole s Autobody and Autohaus Prestige. These businesses enable Autosports to provide a full service to customers and capture synergies from both parts and insurance. The dealerships are concentrated in Sydney and Brisbane as the maps below highlight. Fig 36 Autosports dealerships locations Source: Autosports, January January

23 High level of greenfield start-ups Autosports growth has been from a mixture of greenfield start-ups and acquisitions. Of the 27 current trading locations 12 were greenfield and 15 were acquired. We have detailed current operating locations below. Fig 37 Dealership summary Dealership Map reference Brands Brand category Year acquired / established Under current ownership Audi Sutherland 1 Audi Luxury CY06 greenfield Audi Five Dock 2 Audi Luxury CY06 greenfield Audi Parramatta 3 Audi Luxury CY07 acquisition Prestige Auto Traders 4 Used Motor Vehicles n/a CY09 acquisition Audi Mosman 5 Audi Luxury CY11 acquisition Honda Autosports 6 Honda Prestige CY13 greenfield Alfa Fiat 7 Alfa, Fiat Prestige CY13 greenfield Lamborghini 8 Lamborghini Luxury CY14 greenfield Mazda Toowong 9 Mazda Prestige CY14 acquisition Mercedes Macgregor 10 Mercedes Luxury CY14 acquisition Mercedes Toowong 11 Mercedes Luxury CY14 acquisition VW Five Dock 12 Volkswagen Prestige CY14 acquisition VW Castle Hill 13 Volkswagen Prestige CY14 greenfield VW Mt Gravatt 14 Volkswagen Prestige CY15 greenfield Volvo Sydney 15 Volvo Luxury CY15 greenfield Volvo Parramatta 16 Volvo Luxury CY16 acquisition Autosports Brisbane 17 Used Motor Vehicles n/a CY16 greenfield VW Capalaba 18 Volkswagen Prestige CY16 greenfield Volvo MT Gravatt 19 Volvo Luxury CY16 greenfield Volvo Brighton 20 Volvo Luxury CY16 acquisition Collision repair facilities Autohaus Prestige 21 Collision repair n/a CY10 greenfield Pat Coles 22 Collision repair n/a CY16 acquisition Dealerships to be acquired Audi Brisbane 23 Audi Luxury CY16 acquisition Audi Indooroopilly 24 Audi Luxury CY16 acquisition Bentley Brisbane 25 Bentley Luxury CY16 acquisition Lamborghini Brisbane 26 Lamborghini Luxury CY16 acquisition Maserati Brisbane 27 Maserati Luxury CY16 acquisition Source: Autosports, January 2017 The five dealerships to be acquired are the Willims Motor Group in Brisbane. This group had FY16 revenue of $201.1m and an acquisition price of $72.5m. Audi the largest brand by volume We have detailed the FY16 volume by brand in the table below. Fig 38 FY16 volume by brand Source: Autosports, January 2017 Audi is the largest brand by new car sales volume and is 38% of total volume followed by Volkswagen at 27%. 20 January

24 Whilst this level of brand concentration may appear concerning at first glance, with the top four brands contributing 88% of volume, as the chart below demonstrates, they have all experienced strong volume growth over the past 20 years. This is demonstrated below. Fig 39 ASG's top 4 revenue drivers (Audi #1, VW #2, Mazda #3, MB #4) are experiencing rapid sales growth across Australia 120,000 CAGR 8.0% 100,000 80,000 60,000 40,000 20, % 10.8% 13.2% Source: VFACTS, June 2016 Audi Volkswagen Mercedes-Benz Mazda A well defined strategy Over 50% of growth is organic Autosports has a growth strategy based on both organic and acquisitive growth. Organic growth comes from maturing and new greenfield developments. Core to this strategy is building on Autosports relationships with OEMs including developing multiple sites with each OEM. As the charts below demonstrate, this strategy produces strong growth that is evenly balanced between organic and acquisitions. Fig 40 FY14 to FY16 growth over 50% organic Fig 41 Facility growth over time (number) Source: Autosports, January January

25 Organic growth Dealer awards testament to quality focus Autosports management have had over 20 years in the automotive industry and built solid and ongoing relationship with OEMs. This is best demonstrated by the number of OEM dealer of the year awards won by Autosports. Fig top 3 dealer of the year awards in the past 4 years attests to Autosports quality focus Source: Autosports, January 2017 Having strong relationships with OEMs is likely to lead increased opportunities for greenfield development opportunities, particularly in fast growing brands such as the ones Autosports are associated with. Resulting in greenfield opportunities Organic growth potential as greenfield dealerships mature This is borne out by Autosports being selected to deliver 12 greenfield dealership sites in its first 10 years of operation, including four for previously unrepresented OEMs. Having such a high level of greenfield development means the Autosports business can deliver high levels of organic growth as the back end of the business matures. As discussed above, a top 30% prestige and luxury focussed dealer is likely to generate 53%- 55% of gross profit from front end operations and 45%-47% from back end operations. We estimate Autosports is well below these levels in the back end due to the high level of greenfield activity. We would expect back end profitability to grow over time as greenfield sites mature. This is usually driven by service and parts revenue as the number of new vehicles sold by a site builds over time. Autosports is also investing in its existing facilities to drive organic growth. Current examples include. Volkswagen Five Dock. Relocating an existing 350sqm showroom to a 1,550sqm site in H2 FY17. Audi Sutherland. Expansion of a 480sqm showroom by 420sqm by August Audi Five Dock. Service bay expansion from 14 bays to 40 in FY17. Demand is being driven by the number of new cars sold in FY15 and FY16. Other organic growth initiatives from operational improvements include: Investment in customer relationship management systems to maximise customer retention, service and vehicle sales. A feature of prestige and luxury vehicle dealerships is that the customer ownership life is generally 4-5 years, shorter than for volume dealers. Leverage best practice across dealerships to reduce costs and improve sales performance over the network. Increasing the proportion of higher margin revenue streams such as finance, insurance, parts, servicing and collision repair. 20 January

26 Acquisition growth Plenty of acquisition opportunities Autosports has acquired 13 dealerships since 2006 and will continue to look for prestige and luxury acquisitions in capital cities. The automotive dealership industry is fragmented. Fig 43 Number of East Coast prestige and luxury dealerships Source: Autosports, January 2017 We have detailed below the criteria Autosports uses to assess acquisition opportunities. Financial o o o Dealership profitability across a range of metrics and Autosports own performance. Financial scale and critical mass. Purchase price. Operational o o o o o Dealership location. OEM brand represented. Customer and relationship management. Development potential. Staff quality. We believe management s long standing in the industry, OEM and dealer relationships will help prosecute the acquisition strategy. 20 January

27 Not just a roll up Profit growth is a good mix of organic and acquisitions Autosports has provided detailed profit and loss data from FY14 to FY17e. Fig 44 Summary profit and loss $m FY14a FY15a FY16a FY17e Total revenue , , ,445.1 Growth 59.7% 21.9% 14.1% Cost of goods sold (557.9) (890.7) (1,089.4) (1,236.8) Gross profit Margin 14.3% 14.3% 14.0% 14.4% Employee benefits (34.4) (61.3) (75.1) (81.1) Occupancy (10.2) (16.1) (18.4) (20.1) Other (26.9) (36.1) (42.5) (54.8) Expenses (71.5) (113.6) (136.1) (155.9) Growth 58.7% 19.8% 14.7% Proportion of sales 11.0% 10.9% 10.7% 10.8% EBITDA Margin 3.3% 3.4% 3.2% 3.6% Depreciation and Amortisation (2.0) (3.1) (3.6) (3.8) EBITA Margin 3.0% 3.1% 3.0% 3.4% Floor plan interest (4.2) (5.8) (6.9) (7.0) Corporate interest 0.0 (0.7) (0.2) (1.0) NPBT Margin 2.3% 2.4% 2.4% 2.8% Income tax expense (4.6) (7.6) (9.1) (12.2) Tax rate 30.1% 29.9% 30.1% 30.0% NPATA Minorities 0.0 (0.1) (0.2) (0.3) NPATA attributable to shareholders Source: Autosports, January 2017 The company has grown from eight facilities in FY14 to 27 in FY17. Since the commencement of FY14: 7 greenfield facilities have been established. 7 facilities have been acquired, and 5 dealerships will be acquired on completion from Willims Motor Group. The 5 Willims dealerships and Volvo Brighton have been included in the pro-forma financials from FY14 while the balance of the acquisitions and greenfield establishments have been included from the time of acquisition or establishment. This is depicted graphically below. 20 January

28 Fig 45 Assumptions underlying the pro-forma financials Source: Autosports, January 2017 The other not being acquired in the table above relates to three small dealerships in the Willims group Alfa Romeo Brisbane, Fiat Brisbane and Lotus Brisbane which generate annual revenue of less than $5m and gross profit of less than $1m. Due to difficulties separating out these small dealerships historically, they have been included in the FY14-FY16 pro-forma financials but not in the FY17 forecasts. 20 January

29 Fig 46 Revenue growth has been strong FY14(a) FY15(a) FY16(a) FY17(e) Facility numbers Growth % 14.3% 31.3% 23.8% 3.8% New cars sold 6,647 12,633 15,483 18,320 Growth % 90.1% 22.6% 18.3% Used cars sold 8,099 10,711 15,293 15,338 Growth % 32.3% 42.8% 0.3% Total cars sold 14,746 23,344 30,776 33,658 Growth % 58.3% 31.8% 9.4% Sales/facility , , ,270.1 Growth % 28.4% 3.8% -3.0% Revenue New Vehicle sales Revenue/vehicle 51,362 47,487 47,297 48,013 Used Vehicle sales Revenue/vehicle 26,386 26,926 22,769 23,041 After market Growth % 194.7% 78.6% 35.0% Finance and insurance Growth % 79.2% 18.8% 30.5% Parts Growth % 80.9% 23.3% 7.3% Service Growth % 42.0% 14.7% 26.2% Other Growth % 35.4% 26.4% -0.9% Other/New sales 7.7% 5.9% 6.1% 5.1% Revenue , , ,445.1 Growth % 59.7% 21.9% 14.1% Source: Autosports, January 2017 Strong revenue growth In the above table: New vehicle revenue excludes OEM rebates and bonuses. These are recorded in other revenue. Used revenue includes both vehicles retailed to the public and to wholesale customers. Finance and insurance revenue is commission income. Aftermarket revenue relates mostly to new car sales and is derived from the sale of third party accessories and services. The service business includes the value of parts consumed internally and the revenue from the two collision repair facilities. Other revenue includes OEM and other supplier payments and revenue from Modena Trading (coffee merchandising, less than $2.5m per annum). 20 January

30 Fig 47 ~38% of FY15 revenue growth was organic Source: Autosports, January 2017 High levels of organic growth A near doubling in new car sales in FY15 was driven by a combination of the June 2014 acquisitions of the Toowong (Mazda and Mercedes) and Macgregor dealerships and five new greenfield dealerships. This also boosted aftermarket and finance and insurance revenue. Like for like revenue growth was 17.1% during FY15 driven by both new car dealerships and Prestige Auto Traders (second hand vehicle) growth. Fig 48 ~92% of FY16 revenue growth was organic Source: Autosports, January 2017 Like for like dealerships grew by 18.8% in FY16 and made a strong contribution to growth. Also the greenfields dealerships established in FY15 made a strong contribution in FY16. Used vehicle volume grew by over 40% driven by wholesale operations as scale was built. The increased mix towards wholesale however saw revenue per vehicle fall ~15%. Fig 49 ~88% of FY17e revenue growth is forecast to be organic Source: Autosports, January January

31 Like for like sales growth in FY17 is forecast in the prospectus to moderate to 8.7%, impacted by a more normalised sales pattern for Prestige Auto Traders now that scale has been established. The February 2016 acquisition of Volvo Parramatta and June 2016 acquisition of Pat Cole s Autobody are expected to be strong contributors in FY17. Maturing sites drive back end revenue A feature of forecast FY17 revenue is the 26% growth forecast in service revenue as greenfields sites established in prior years begin to mature and vehicles return to dealerships for their second and third services. Other revenue is typically mostly related to new car sales revenue and is forecast to fall from ~6% of new car revenue to 5.1% in FY17 as the FY17 forecast does not reflect some contingent bonuses. 20 January

32 Fig 50 Gross margins consistent 15.0% 14.5% 14.0% 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% FY14(a) FY15(a) FY16(a) FY17(e) Source: Autosports, January 2017 Gross margins have varied from a low of 14.0% in FY16 to a high forecast of 14.4% in FY17e. Gross margin fell in FY16 due to the five new greenfield dealerships started in FY15, which take time to ramp up to full margins, and strong growth in lower margin wholesale used vehicles in Prestige Auto Traders. FY17 margin is forecast to revert to historic levels due to a number of factors. Lower proportion of wholesale used vehicles. Impact of operational improvements and management changes at VW Castle Hill, Five Dock and Mt Gravatt. Growth from new Audi models (Q2 and Q5) and a new Sutherland showroom. A full year contribution from the higher margin Pat Cole s Autobody business. Fig 51 Cost of doing business also flat to down over time 11.2% 11.0% 10.8% 10.6% 10.4% 10.2% 10.0% FY14(a) FY15(a) FY16(a) FY17(e) Source: Autosports, January January

33 Autosports cost of doing business falls into three main buckets. Staff 52%. Occupancy 13%. Other 35% Other expenses include marketing, fleet and distribution and outside service costs. No acquisition synergies forecast The cost of doing business has been falling marginally as a proportion of revenue due to a combination of careful cost management and increased scale of the business. This is forecast to reverse a little in FY17. Conservatively, there are no synergies forecast from the Willims acquisitions in FY17. Depreciation and amortisation in Figure 44 (above) is exclusive of annual amortisation of acquired intangibles of $3.5m. The average interest rate on debt is forecast to be ~4% in FY17e and tax is forecast at the full corporate rate of 30%. The small minority interest line relates to the 20% stake in New Centenary Mazda held by the dealer principal. One key to the overall profit and loss is the OEM and other supplier payments in other revenue. It is important note that whilst this revenue relates mostly to new car revenue, it is not just based on the achievement or otherwise of sales targets. These payments are: Payment received from OEMs for sale of new Motor Vehicles. Payments received for achievement of OEM targets including factory volume targets, model mix and a consumer satisfaction index bonus. Net Amount Financed bonuses, which relate to bonuses paid by finance companies for achieving or exceeding targets for loan amounts on new and used Motor Vehicles. Other incentive payments from suppliers. Autosports has industry standard earnings seasonality with H1 revenue between 43% and 46% of full year revenue across FY14 to FY16. Apart from business growth, January is a strong month with new model release and June is traditionally the largest month of the year in the industry. Cost of goods sold is seasonal with revenue but expenses are more evenly spread resulting in EBITDA in H1 being 40% to 48% of full year EBITDA across FY14 to FY16. Metrics match up well to peers and internationally As well as locally listed peers, Autosports has some internationally listed comparables, particularly in the US. We look to US dealership groups where some high profile investors have purchased holdings in leading stocks. This includes Warren Buffet, who in March 2015 purchased the Van Tuyl group. Van Tuyl at the time was the fifth largest vehicle dealership group in the US with ~US$8bn in revenue and sales volume of ~240,000 cars per annum. Also AutoNation (AN.US, not covered) is 18% owned by Bill Gates. The US groups we have looked at are: AutoNation. AutoNation is the largest automotive retailer in the US. As of December 2015 it owned 342 new vehicle franchises operated from 254 stores. CY15 revenue was US$20.9bn and its current market capitalisation is US$4.9bn. Penske (PAG.US, not covered). Penske is the number two automotive retailer in the US with 181 of its 355 franchises in the US. Most of the rest of its franchises are located in the UK. CY15 revenue was US$17.9bn and its current market capitalisation is US$4.1bn. Lithia Motors (LAD.US, not covered). Lithia has 139 franchises in the US and CY15 revenue of US$7.9bn and current market capitalisation of US$2.3bn. 20 January

34 To put the size of these companies into perspective there are ~18,000 dealerships in the US with the top 10 dealers accounting for ~7% of the ~17.4m new cars sold each year. The table below highlights the revenue breakdown of these three vehicle retailers in CY15 by the main revenue streams. Fig 52 US dealership groups revenue breakdowns highlights the relative immaturity of the Autosports business FY15 Revenue Autonation Penske Lithia Average Autosports (FY16) New 57% 51% 58% 56% 62% Used 23% 30% 28% 27% 27% F&I 4% 3% 4% 3% 1% Parts and Service 15% 10% 9% 11% 9% Other 1% 5% 1% 2% 0% Total 100% 100% 100% 100% 100% Source: Company data, January 2017 We have added Autosports other revenue into new to make comparisons with the US peers on a like for like basis. The above table highlights the reasonably consistent breakdown of dealership revenues with the main difference being Penske, which reports wholesale revenue (sales of second hand vehicles to wholesalers as opposed to retail buyers) in other revenue while Autonation and Lithia report this as used revenue. Comparisons highlight immaturity of Autosports business It also highlights the relative immaturity of the Autosports back end with service and parts only being 9% of revenue compared to the average of 11%. We have detailed the FY15 revenue per vehicle for these groups below, which highlights Penske s relative overweight (72%) to premium brands. Fig 53 Penske is relatively overweight premium brands (CY15) New vehicle revenue/unit (USD) Used vehicle revenue/unit (USD) 40,000 39,000 38,000 37,000 36,000 35,000 34,000 33,000 32,000 31,000 30,000 29,000 Autonation Penske Lithia Average 30,000 25,000 20,000 15,000 10,000 5,000 0 Autonation Penske Lithia Average Source: Company data, January 2017 Autosports average revenue per vehicle in new is US$36,300 (at 76.7c exchange rate) and for used is US$17,500 highlighting that it is broadly in line with the US industry. AHG does not disclose its revenue breakdown but locally listed peer AP Eagers discloses all of the above revenue streams except for finance and insurance income, which appears to be included in new and used revenues. We have detailed its CY15 revenue breakdown below for comparison purposes. New 62% Used 20% Parts and service 18% 20 January

35 Again, this highlights the longer-term parts and service opportunity for Autosports. After allowing for F&I being included in new and used revenues, AP Eagers appears to have a broadly similar revenue profile to the US groups sampled. Its revenue per new unit of $38,600 and used of $24,700 are probably inflated by ~$1,000 per unit for F&I income. It is also worth noting that AP Eagers generates ~11% of revenue from its truck retailing business, which would also distort revenue breakdowns and boost unit values (AP Eagers generated ~$133,000 per unit including parts and finance from its truck operations in FY15). We caution against translating this data directly mainly as we believe Australian dealers have a lower penetration into the used vehicle market when compared to the US and also that US dealers sell a wider range of F&I products and have a higher penetration rate than Australian dealers. For example, Lithia Motors estimated in a recent presentation franchised dealers had 37% of the US used car market while in its AGM presentation last year, AHG estimated that it had 6.6% of the new car market and 1.6% of the used car market. Our US peers generate an average of A$1,600 (at a 76.7 cent exchange rate) per vehicle in F&I income driven by high penetration rates and products such as service contracts and lifetime oil contracts. This compares to the Deloitte prestige benchmark for Australia of $1,100-$1,300 per vehicle retailed (i.e. adjusted for penetration). The US peers disclose gross profits and SG&A expense, which we have detailed in the table below. Fig 54 Autosports has lower gross and similar COBD to its US peers (CY15, Autosports FY17e) US gross margins average ~15% US CODB averages ~11% 16.0% 12.0% 15.0% 11.0% 14.0% 10.0% 13.0% 9.0% 8.0% 12.0% 7.0% 11.0% 6.0% 10.0% Autonation Penske Lithia US Average Autosports 5.0% Autonation Penske Lithia US Average Autosports Source: Company data, January 2017 Autonation has the highest gross margin and low SG&A expense, reflecting its status as the US s largest automotive dealer and the fact that it operates only in the US compared to Penske, which operates internationally. This carries through into EBITDA margins as demonstrated below, where the US only businesses have the highest margins. Again, the chart below highlights the margin opportunity for Autosports in the medium term. 20 January

36 Fig 55 Australian EBITDA margins below the US average of 4.2% (CY15 for US companies and APE/FY16 for AHG, FY17e for Autosports) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Autonation Penske Lithia US Average Autosports AHG APE Source: Company data, January 2017 EBITDA margins are comparable Each 0.1% on EBITDA margin equates to $1.4m in EBITDA to Autosports or a ~2.75% in FY17e EBITDA. Diving deeper into this analysis, the US peers also disclose the breakdown of their gross profit by revenue stream. We have detailed this below. Fig 56 US dealerships are reasonably balanced businesses FY15 Gross profit proportions Autonation Penske Lithia Average New 21% 27% 24% 24% Used 11% 13% 21% 15% F&I 27% 18% 24% 23% Parts and Service 41% 42% 31% 38% Other 1% 0% 0% 0% Total 100% 100% 100% 100% Source: Company data, January 2017 The table above highlights that the average US dealership generates ~60% of gross profit upfront (from the sale of new and second hand vehicles and finance) and ~40% as ongoing gross profit from parts and service. This compares to Autosports, which generates ~30% from the back end. We believe Penske s higher proportion of gross profit from new and used sales is due to its higher focus on premium brands as discussed above. The table below details the gross margins these dealers generate by revenue stream. Fig 57 Gross margin similar in the end FY15 Gross margin Autonation Penske Lithia Average New 5.6% 7.7% 6.2% 6.5% Used 7.4% 6.1% 11.2% 8.2% F&I 100.0% 100.0% 100.0% 100.0% Parts and Service 43.4% 59.2% 49.2% 50.6% Other 19.1% 1.1% 2.6% 7.6% Total 15.6% 14.6% 14.9% 15.1% Source: Company data, January 2017 Again, this table highlights Penske s position as a retailer of premium brands where margins are higher on both new cars and parts. 20 January

37 The ratio of used to new car volumes is detailed in the table below. Fig 58 Autosports does well in used (CY15 for US companies and APE/FY16 for AHG, FY17e for Autosports) 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x Autonation Penske Lithia US Average Autosports APE AHG Source: Company data, January 2017 Autosports is strong in used cars The above chart demonstrates that US dealers sell more used cars relative to new cars when compared to Australian dealers AHG and APE. However, Autosports through both its dealers and specialist Prestige Auto Traders business does well in this area. We believe that the extra focus on used will prove to be a competitive advantage for Autosports into the medium term as its business matures. 20 January

38 Historically strong cash conversion We have detailed the Autosports pro-forma cash flow statement below. Fig 59 Summary pro-forma cash flow $m FY14a FY15a FY16a FY17e EBITDA Movement in working capital (10.3) (1.1) (4.7) (3.9) Other non-cash items 0.7 Operating cash flow Floor plan interest (4.2) (5.8) (6.9) (7.0) Operating cash flow after floor plan interest Growth capital expenditure (2.4) (3.2) (2.7) (7.7) Maintenance capital expenditure (1.3) (2.5) (2.5) (1.7) Proceeds on disposal Acquisitions (14.4) (4.6) (4.1) Net capital expenditure (17.3) (10.2) (9.1) (9.4) Net cash flow before corporate financing and tax (10.3) Income taxes paid (11.1) Corporate interest (paid)/received (1.0) Free cash flow 20.7 Source: Company data, January 2017 Autosports is a strong cash generator as customers pay for cars on delivery. The company has 48 hours to repay the bailment finance. Swings can occur in cash flow, like FY14 above, when a year-end falls on the weekend. In this case, 30 June 2013 was a Sunday, meaning cars delivered after Thursday 27 th June were not paid for by Autosports until the following financial year. This boosted FY13 cash flow at the expense of FY14. This effect is exacerbated by the fact that June is the largest sales month of the year. The above cash-flow statement also highlights Autosports capital efficient development model, which does not consume large amounts of working capital despite the strong growth in sales. Growth capex has generally been for greenfields dealer establishments and expansions. FY17e capex is for additional service bays and Audi Five Dock, leasehold improvements at VW Leichardt, VW Mt Gravatt and Volvo Parramatta, expansion of Audi Sutherland and improvements at Mercedes Toowong. In the table below, we detail Autosports high underlying NPAT to cash conversion. Fig 60 Cash conversion strong $m FY14a FY15a FY16a FY17e Operating cash flow after floor plan interest Pre-tax profit (NPBTA) Corporate interest Adjusted pre-tax profit Cash conversion 46% 108% 96% 102% Source: Company data, January 2017 This high level of cash conversion will allow Autosports to target a dividend payout ratio of 60-70% of NPATA. The first dividend is expected to be in respect of the period ended June January

39 Balance sheet net debt free We have detailed the Autosports pro-forma balance sheet below. Fig 61 Pro forma FY16 Balance Sheet $m Pro forma Current assets Cash 25.0 Inventory Other current assets 3.2 Receivables 40.6 Total current assets Non-current assets Fixed assets 18.2 Goodwill Other intangibles 17.5 Other non-current assets 5.6 Total non-current assets Total Assets Current liabilities Trade and other payables (40.9) Floor plan finance facilities (215.5) Capital loans (13.6) Other borrowings (1.1) Short-term provisions (8.7) Total current liabilities (279.7) Non-current liabilities Capital loans (6.7) Employee benefits (2.2) Deferred tax and other (5.4) Total non-current liabilities (14.3) Total Liabilities (294.1) Net Assets Equity Retained earnings (8.7) Capital Outside equity interests Total equity Source: Company data, January 2017 Given FY17e NPATA of $28.1m and $436.0m in equity, pro-forma ROE is forecast to be 6.4%. The high value of shareholders funds is due to the post transaction restructure where the public company is deemed to have acquired each dealership at fair value, resulting in the recording of $312.9m in goodwill, $13.5m in other intangibles and $4.0 in deferred tax. The balance of $322.3m has been recorded in equity. The EBITA return on tangible assets is strong at 15.9%. Pro-forma net debt to EBITDA is (0.1)x The pro-forma balance sheet had inventory of $214.0m funded by $215.5m in floor plan facilities. Autosports has total floor plan facilities of $252.5m with three funders. The funder retains ownership of the vehicle but the dealer has possession. The floor plan facilities can generally be terminated with 30 to 90 days notice and are recorded as a current liability. Autosports has capital loan facilities totalling $20.3m. These are mostly to fund capital improvements and do not have specific covenants. They are mostly at-call facilities and classified as current liabilities. The average interest rate is 5% on these facilities. We have detailed Autosports debt coverage ratios in the table below. 20 January

40 Fig 62 Debt and interest cover is strong $m FY17e Interest Paid Floor plan 7.0 Other 1.0 Total 8.0 Interest received 0.0 Net interest 8.0 Net interest less floor plan 1.0 EBITDA 52.3 EBITDA less floor plan 45.3 EBITDA interest cover 5.7x EBITDA interest cover (excluding floor plan) 45.3x Net Debt Floor plan Net Debt ex floor plan (3.6) ND/EBITDA Source: Company data, January x Annual property lease commitments are $16.5m per annum. This makes fixed charges cover on an EBITDA basis a solid 2.8x in FY17e. This calculation includes floor plan interest and would rise to 3.9x excluding floor plan interest. Eight properties are leased from related parties. We detail below the summary financials for Autosports. 20 January

41 Autosports (ASG:$2.55) 19-Jan-17 Interim results 2H15(a) 1H16(a) 2H16(a) 1H17(e) Profit & Loss 2015A 2016A 2017E 2018E Revenue Revenue $m EBITDA $m 23.1 EBITDA $m Depreciation $m 1.9 Depreciation $m Amortisation of goodwill $m 1.8 Amortisation of goodwill $m EBIT $m 19.4 EBIT $m Net Interest expense $m 4.0 Net interest expense $m Pre-Tax Profit $m 15.4 Pre-Tax Profit $m Tax Expense $m 5.1 Tax Expense $m Net Profit $m 10.3 Net Profit $m Outside equity interests $m 0.2 Outside equity interests $m Net Abn/Extra $m 0.0 Net Abnormals/Extra. $m Reported Earnings $m 10.1 Reported Earnings $m Adjusted Earnings $m 11.9 Adjusted Earnings $m Gross Cashflow $m 13.9 Gross Cashflow $m EPS (Adj/dil) c 5.9 EPS (adj/diluted) c EPS growth % nmf EPS growth % 34.5% 10.5% CFPS c 17.0 PE (adj) x CFPS Growth % nmf CFPS c EBITDA/Sales % 3.6 CFPS Growth % EBIT/Sales % 3.0 PGCFPS x Earnings Split % 42.2 DPS c Revenue Growth % nmf Yield % EBIT Growth % nmf Franking % Profit and Loss ratios 2015A 2016A 2017E 2018E Cashflow Analysis 2015A 2016A 2017E 2018E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Capex - Plant & Equip. $m Balance sheet ratios Asset Sales $m ROE % Other $m ROA % Investing cashflow $m ROFE % Dividend (ordinary) $m Net Debt $m Equity raised $m Net Debt/Equity % Other $m Interest Cover x Financing cashflow $m Price/NTA x NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 2012A 2013A 2014A 2015A Balance Sheet 2015A 2016A 2017E 2018E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m EPS (adj/dil) c Other Liabilities $m EPS growth % nmf 0.7 Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % nmf nmf ROFE % nmf nmf Total Funds employed $m EFPOWA m A 2016A 2017E 2018E 2015A 2016E 2017E 2018E Sales Gross profit ND/EBITDA x Margin 14.3% 14.0% 14.4% 14.5% EBITDA/Net Interest x ND/Tangible assets % 61% 57% CODB CODB/Sales 10.9% 10.7% 10.8% 10.8% Total EBITDA Margin 3.4% 3.2% 3.6% 3.7% Source: Company data, Macquarie Research, January January

42 Appendix 1 Key people Directors We have listed Autosports directors below. Tom Pockett, Chairman. Tom has over 30 years experience in Accounting and Finance with a focus on the retail sector. He was previously the Finance Director of Woolworths. Other board positions include Insurance Australia Group, Stockland and Sunnyfield Independence Association. Nick Pagent, CEO. Nick has over 19 years experience in the motor vehicle business and was the founding CEO of Autosports in He has worked with Audi and Mercedes-Benz in London and previously spent five years with the Trivett Classic Group as General Manager of Honda, Audi, MG Rover and Alfa Romeo. Ian Pagent, Executive Director. Ian has over 47 years experience in the motor vehicle industry and is a founding Executive Director of Autosports. Between 1988 and 2002 Ian was co-owner of Trivett Classic Group. Malcolm Tilbrook, Director. Malcolm has over 30 years banking experience and was most recently Managing Director of ANZ s Esanda Motor Vehicle Finance business. Robert Quant, Director. Robert has over 30 years accounting experience and was CEO of Grant Thornton between 2008 and Marina Go. Marina has over 25 years experience in the media industry and is the head of the Hearst business in Australia for Bauer Media. The Pagent family and other management shareholders have entered into an escrow arrangement whereby half of their holdings will be held in escrow until the release of the FY18 result with the balance to be released after the FY19 result. Staff and management Autosports key manager other than Nick and Ian Pagent is detailed below. Aaron Murray, CFO. Aaron has over 20 years experience in the accounting and motor vehicle industry. He joined Autosports in 2007 and has been CFO since Previously, Aaron held accounting and finance roles with Trivett Classic. Autosports employs over 850 staff across 25 dealerships and 2 collision repair workshops. Apart from 35 head office employees, Autosports has a flat management structure with each dealer principal reporting directly to CEO Nick Pagent. 20 January

43 Appendix 2 Brand segmentation Deloitte segments the brands in its dealership benchmarks into four main categories. These are: Volume Prestige Luxury Super Luxury & Niche. The individual brands are listed in the table below. Fig 63 Deloitte brand segmentation Volume Prestige Luxury Super Luxury and Niche Chery Alfa Audi Aston Martin Great Wall Chrysler BMW Bentley Ford Citroen Infiniti Caterham Foton Dodge Jaguar Ferrari Holden Fiat Land Rover Hummer Hyundai Honda Lexus Lamborghini Isuzu Jeep Mercedes-Benz Lotus Kia Mazda MINI Maserati Mitsubishi Peugeot Volvo Maybach Nissan Smart McLaren Opel Subaru Morgan Proton Volkswagen Porsche Renault Rolls-Royce Skoda Ssangyong Suzuki Toyota Source: Deloitte, January 2017 Autosports operates in the prestige and luxury segments. 20 January

44 Appendix 3 Peer summary financials Fig 64 Summary Autonation (AN.US) historical financials (USD) Revenue CY13 CY14 CY15 New 9, , ,995.0 Used 4, , ,768.7 F&I Parts and Service 2, , ,082.8 Other Total 17, , ,862.0 Domestic 5, , ,069.8 Import 6, , ,037.2 Luxury 5, , ,607.8 Other Total 17, , ,862.0 Units Domestic 96, , ,519.0 Import 143, , ,868.0 Luxury 53, , ,693.0 Total New 292, , ,080.0 Used 204, , ,290.0 Total 497, , ,370.0 Revenue per unit New 33,967 34,503 35,375 Used 20,176 20,407 20,981 Gross profit New Used F&I Parts and Service 1, , ,338.0 Other Total 2, , ,261.5 Gross profit % New 6.2% 5.9% 5.6% Used 8.0% 8.2% 7.4% F&I 100.0% 100.0% 100.0% Parts and Service 42.6% 42.4% 43.4% Other 20.1% 17.2% 19.1% Total 15.8% 15.6% 15.6% Gross profit per vehicle New 2,104 2,044 1,985 Used 1,612 1,678 1,556 F&I 1,355 1,409 1,534 Total excl parts 3,257 3,305 3,347 SG&A 1, , ,263.5 SG&A/sales 11.0% 10.9% 10.8% EBITDA Margin 4.7% 4.8% 4.8% Source: Autonation, January January

45 Fig 65 Summary Penske (PAG.US) historical financials (USD) Revenue CY13 CY14 CY15 New 7, , ,208.9 Used 4, , ,425.5 F&I Parts and Service 1, , ,830.7 Other Total 14, , ,896.3 Units New 195, , ,524.0 Used 163, , ,459.0 Total 358, , ,983.0 Revenue per unit New 38,494 40,159 39,434 Used 25,719 27,297 27,338 Gross profit New Used F&I Parts and Service , ,084.0 Other Total 2, , ,608.0 Gross profit % New 7.7% 7.8% 7.7% Used 7.3% 6.7% 6.1% F&I 100.0% 100.0% 100.0% Parts and Service 59.3% 59.5% 59.2% Other 1.5% 1.2% 1.1% Total 15.2% 14.9% 14.6% Gross profit per vehicle New 2,969 3,114 3,027 Used 1,879 1,842 1,654 F&I 1,032 1,094 1,107 Total excl parts 3,505 3,627 3,504 SG&A 1, , ,018.2 SG&A/sales 11.8% 11.6% 11.3% EBITDA Margin 3.4% 3.3% 3.3% Source: Penske, January January

46 Fig 66 Summary Lithia (LAD.US) historical financials (USD) Revenue CY13 CY14 CY15 New 2, , ,552.3 Used 1, , ,188.6 F&I Parts and Service Other Total 4, , ,864.3 Units New 66, , ,486.0 Used 79, , ,276.0 Total 146, , ,762.0 Revenue per unit New 33,753 33,782 33,111 Used 15,041 15,646 15,943 Gross profit New Used F&I Parts and Service Other Total ,175.6 Gross profit % New 6.7% 6.4% 6.2% Used 12.9% 11.7% 11.2% F&I 100.0% 100.0% 100.0% Parts and Service 48.4% 48.8% 49.2% Other 4.7% 4.1% 2.6% Total 15.8% 15.3% 14.9% Gross profit per vehicle New 2,260 2,175 2,039 Used 1,940 1,836 1,790 F&I ,030 Total excl parts 3,039 2,997 2,945 SG&A SG&A/sales 10.7% 10.4% 10.3% EBITDA Margin 5.1% 4.8% 4.6% Source: Lithia, January January

47 Fig 67 Summary AP Eagers (APE.AU) financials (AUD) Interim results 1H15(a) 2H15(a) 1H16(a) 2H16(e) Profit & Loss 2015A 2016E 2017E 2018E Revenue Revenue $m EBITDA $m EBITDA $m Depreciation $m Depreciation $m Amortisation of goodwill $m Amortisation of goodwill $m EBIT $m EBIT $m Net Interest expense $m Net interest expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Outside equity interests $m Outside equity interests $m Net Abn/Extra $m Net Abnormals/Extra. $m Reported Earnings $m Reported Earnings $m Adjusted Earnings $m Adjusted Earnings $m Gross Cashflow $m Gross Cashflow $m EPS (Adj/dil) c EPS (adj/diluted) c EPS growth % EPS growth % % 9.2% 2.3% CFPS c PE (adj) x CFPS Growth % CFPS c EBITDA/Sales % CFPS Growth % EBIT/Sales % PGCFPS x Earnings Split % DPS c Revenue Growth % Yield % EBIT Growth % Franking % Profit and Loss ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Capex - Plant & Equip. $m Balance sheet ratios Asset Sales $m ROE % Other $m ROA % Investing cashflow $m ROFE % Dividend (ordinary) $m Net Debt $m Equity raised $m Net Debt/Equity % Other $m Interest Cover x Financing cashflow $m Price/NTA x NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 2012A 2013A 2014A 2015A Balance Sheet 2015A 2016E 2017E 2018E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m EPS (adj/dil) c Other Liabilities $m EPS growth % Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % ROFE % Total Funds employed $m 1, , , ,902.5 EFPOWA m Source: AP Eagers, Factset estimates, January January

48 Fig 68 Summary Automotive Holdings (AHG.AU) financials (AUD) Interim results 2H15(a) 1H16(a) 2H16(a) 1H17(e) Profit & Loss 2016A 2017E 2018E 2019E Revenue Revenue $m EBITDA $m EBITDA $m Depreciation $m Depreciation $m Amortisation of goodwill $m Amortisation of goodwill $m EBIT $m EBIT $m Net Interest expense $m Net interest expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Outside equity interests $m Outside equity interests $m Net Abn/Extra $m Net Abnormals/Extra. $m Reported Earnings $m Reported Earnings $m Adjusted Earnings $m Adjusted Earnings $m Gross Cashflow $m Gross Cashflow $m EPS (Adj/dil) c EPS (adj/diluted) c EPS growth % EPS growth % % 5.9% 4.5% CFPS c PE (adj) x CFPS Growth % CFPS c EBITDA/Sales % CFPS Growth % EBIT/Sales % PGCFPS x Earnings Split % DPS c Revenue Growth % Yield % EBIT Growth % Franking % Profit and Loss ratios 2016A 2017E 2018E 2019E Cashflow Analysis 2016A 2017E 2018E 2019E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Capex - Plant & Equip. $m Balance sheet ratios Asset Sales $m ROE % Other $m ROA % Investing cashflow $m ROFE % Dividend (ordinary) $m Net Debt $m Equity raised $m Net Debt/Equity % Other $m Interest Cover x Financing cashflow $m Price/NTA x NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 2013A 2014A 2015A 2016A Balance Sheet 2016A 2017E 2018E 2019E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m EPS (adj/dil) c Other Liabilities $m EPS growth % Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % ROFE % Total Funds employed $m 2, , , ,447.0 EFPOWA m Source: Automotive Holdings, Macquarie Research, January January

49 Appendix 4 Industry regulation There are a substantial number of licenses required and regulations impacting on the automotive dealership industry in Australia. We have detailed these below. Licencing A motor vehicle dealer must be licenced by the relevant state government. Most typical licence requirements revolve around being of sound character and having the necessary financial resources. Additionally, in New South Wales, an Automotive Repairer s Licence is required to carry out repair work. Consumer finance Dealers require either an Australian credit licence under the National Consumer Credit Protection Act (NCCP Act) or a point of sale exemption where credit is applied to the purchase of goods from a supplier. ASIC is considering narrowing the point of sale exemption, prohibiting financiers from paying dealers commissions funded by the borrower and banning flex commissions. A flex commission is where a dealer sets the interest rate payable by the customer. Insurance sales To distribute insurance products a dealer must have an Australian Financial Services Licence (AFSL) under the Corporations Act or become an authorised representative of an insurer. ASIC has recently conducted a review into the sale of add on insurances by dealers and announced improvements to the design of products and pricing and the limiting of commissions to 20%. Consumer protection The ACCC is undertaking a market study with a report due in Q1 CY17 into the new car retailing industry focussing on: compliance with consumer guarantee obligations and the ability of consumers to enforce their rights; false, misleading and deceptive practices in performance, fuel efficiency, fuel consumption and emissions; the effect on competition and consumers of post-sale care arrangements (such as servicing); and whether consumers and businesses could be affected by any restrictions on Motor Vehicle access to data. Luxury car tax A 33% luxury car tax is imposed on vehicles with a value including GST over $64,132. The tax is based on the amount above the threshold. The threshold is increased to $75,526 for fuel efficient vehicles. Novated leases A novated lease is an alternate funding form that can have tax benefits for consumers. Large users are employees of Governments, public benevolent institutions, the medical sector and charities. 20 January

50 Motor vehicle import restrictions The Federal Government has proposed changes to the Motor Vehicle Act from 2018 that would allow consumers to import vehicles directly that: are sourced from the United Kingdom or Japan; are less than 12 months old; and have less than 500km on the odometer. This is not expected to have a material impact on car dealerships but will give consumers more choice. 20 January

51 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) ASG AU vs Small Ordinaries, & rec history AHG AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January month target price methodology ASG AU: A$2.83 based on a EV/EBITA methodology AHG AU: A$4.50 based on a EV/EBITA methodology Company-specific disclosures: ASG AU: MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 12 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of 's equity securities. AHG AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Automotive Group Holdings Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Target price risk disclosures: ASG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. AHG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. 20 January